Cash management in anticipation of U.S. capital controls

Copyright 2013 John T. Reed

I was recruited out of Harvard Business School to work at Crocker National Bank in the San Francisco financial district in 1977. Initially, I was going to be in construction finance, but at the last minute, they said I would be in the international division.

WTF?

SWIFT

But at that point things were too far along to change. I had turned down the other offers, the moving trucks were coming, etc. But what the hell was I, a real estate investment expert going to do in a bank international department? One thing that happened that year was the invention and implementation of SWIFT. They had me do bit of a research project on how Crocker could use it.

I said it was just a better fax machine and every other bank had it so it offered no competitive advantage and we should just assure customers that we had it, too. The boss was not pleased and told me to restudy it. I responded that I had already interviewed the world’s biggest expert on SWIFT at length and there was nothing to restudy. He was not pleased about that either.

SWIFT is the method I have lately been using and telling you guys to use to transfer money internationally. I just sent a Swift wire to one of my banks in Auckland, New Zealand last Friday.

Swift sucks. For one thing, it costs about $45 each time you use it counting fees at both the sending and receiving ends. That’s too much and is a racket and obviously has no bearing on the out-of-pocket costs to the banks in an era of email and satellite communications.

Furthermore, SWIFT is not swift. It is slow-boat to China, for no apparent reason other than the banks trying to profit from the float, i.e., use of your money during the time it is in SWIFT. Since interest rates are currently near zero, that ain’t worth much these days. We’re talking like five or six days to Australia or New Zealand.

So, ironically, here I am 36 years after graduating from Harvard Business and going to work in the Crocker international department writing all sorts of stuff about international finance.

Cash management course

While at Crocker, I and the other MBAs they had just hired got a course in cash management. As I recall, it took a day or two. One of the teachers was a Harvard MBA whom we later became friends with who lives near us now. We recently went to a meeting he organized where the former governor of Nevada told about a book he wrote about his state.

In 1977, the interest rate on U.S. bonds was 7.75%! That meant that float could be quite valuable. So cash management was all the rage in finance.

The basic idea was to get money coming to you into an interest bearing account ASAP and to pay money out as slow as possible. This makes the most sense when you are handling large amounts of money or interest rates are high or both.

Chapter 8 of my book How to Manage Residential Property for Maximum Cash Flow and Resale Value, 6th edition, is titled “Cash management.” Apartment owners typically handle, but do not get to keep, large amounts of rent.

At its peak, cash management became comical. A typical large sophisticated company might be in Kansas but pay its West-of-the-Mississippi bills by mail out of a bank in rural Maine and its east of the Mississippi bills by mail out of a rural bank in Dutch Harbor, Alaska (Deadliest Catch location).

For collecting money due it, on the other hand, they would have bank accounts wherever they had customers and demand in contracts that customers wire the money into those accounts on the date due.

Collect fast. Pay slow. And collect as much interest on the money in the interim as possible. Got it?

Capital control cash management

Okay. No, let’s apply that thinking to the threat of hyperinflation and capital controls here in the U.S.

The first sentence in my book How to Protect your Life Savings from Hyperinflation & Depression, 2nd edition is, “It could happen tomorrow.” So that means you need to get all your US dollars into hard assets or selected foreign currencies.

But there are two issues:

• You continually get paid in U.S. dollars (USD) from salary, business, government checks, pensions, and so on.

• You probably have to pay most of your routine bills in USD.

Move it all out, not just rainy-day savings

So since hyperinflation could happen tomorrow, you should get rid of all your USD now and get rid of any USD you receive in the future ASAP. If you keep the money in currency, that means that means you convert your USD to AUD, CAD, CHF, NZD ASAP.

But you still have to pay those USD bills.

If you constantly convert every penny of USD to foreign currency, and you continue to get bills that have to be paid in USD, you will have to convert those recently purchased, say, CAD back into USD when you pay your creditors who demand USD. That would mean you would pay currency-conversion costs going and coming.

How much would that be? Ask your bank. I recommend Bank of Montreal (BMO) in Vancouver. My banker there is James Curran, Financial Service Manager
Transit 0004, 595 Burrard Street, Vancouver, BC V7X-1L7
Tel: 604-665-7175
Fax:604-665-6614
James.Curran@bmo.com

But BMO also offers USD accounts. So how about putting your routine-bill-paying money into a USD account in a Canadian bank?

Why have a USD account in Canada?

Why bother when it is still in USD? If USD hyperinflation hits, it will make all USD-denominated assets worldwide worthless, including those you put into a Canadian or other foreign bank.

So what’s the point?

Capital controls

USD in a Canadian bank account are better than USD in a US bank account because the USD in a Canadian bank account, while still at risk to a fall in the purchasing power of the USD, are outside the jurisdiction of the U.S. government capital controls which will probably be “enacted” by Executive Order within hours or minutes of the beginning of the run on the dollar. See my article the Day the Dollar Dies.

If your USD are still in the US when those capital controls are put in place, you’re screwed. At that point, the U.S. government, which is the perpetrator of the hyperinflation, is locking you into USD for the duration so they can pick your pocket as much as possible.

Online transfer that would be prohibited if not in Canada

If, however, your USD are in Canada when the run on the US dollar begins, you simply go on line to your Canadian accounts and select “transfer.” Then you move all your USD in your Canadian bank account into your other Canadian bank account that is in Canadian dollars (CAD). That converts your USD to CAD with a couple of key strokes. Probably takes about 20 seconds. I do it once a month on line at BMO.

Butta bing butta boom. You’re thereafter protected from further USD hyperinflation on the USD you already have up there.

All USD income goes to Candian bank USD account ASAR (as soon as received)

I think the correct approach, capital control cash management, is to send your USD income to a USD checking account at BMO or another Canadian bank as soon as you can after you get it. Ideally, you would have it direct deposited into the Canadian account. Social Security will do that if you have a residence address in that country, but not otherwise. So I move the after tax amount of my social security check to Canada by snail mail each month roughly on the day it is deposited in my US bank account.

Once the money is in the Canadian checking account, move all the money not needed to pay routine bills to your CAD savings account. Then, as they come due, pay your USD bills out of your USD checking account in Canada.

Can you do that the same as paying your bills out of a checking account in the U.S.? Yes and no.

Two problems with US bank account

As if the money were in a U.S. bank, there would be no currency-conversion charge. But there are two problems:

• If you mail checks out of Canada to the U.S. they will take a long time to arrive because crossing the Canadian border adds something like a week to snail mail travel time.

• A check drawn on a Canadian bank, even if it is in USD, is not a regular check like one drawn on an American bank. It is what is called in the banking industry a “collection item.” That means they take longer to clear once the snail mail has finally delivered them to the payee. And they often trigger fees that the payee must pay.

If you pay U.S. creditors with USD checks drawn on a Canadian bank, your creditors will at the very least be annoyed at the extra time it takes to clear and they will be very annoyed if they have to pay a fee. Arguably, if you pay a $100 invoice with a $100 check but the payee only gets $95 because of a collection-item fee due to your bank being in Canada, you have not paid the bill in full.

Sophisticated creditors probably prohibit paying your US bills with foreign bank checks

Furthermore, sophisticated creditors like mortgage servicers and credit card companies have most likely required in their fine print that you pay with checks drawn on U.S. banks.

USD money order

I asked James about this. He said he has one monthly USD bill—a Macy’s card. How does he pay it? With a USD money order from BMO. Apparently such money orders are not collection items. What is the fee? Zero.

Okay. We pay our bills weekly. Could we pay them all with money orders? James said we could but as we talked about the mechanics it sounded like a bit much for BMO to be doing. I would have to print out each bill on a white paper sheet set up for a double window envelope. My address would be in the top window; the payee’s name and address in the lower window. I would have to send a bunch of pre-stamped—with Canadian international postage—double-window envelopes to BMO Canada. Each sheet would contain the amount and account number of the bill in question.

BMO would then use the sheets and their information to generate each money order. Then they would fold the sheets to fit into the double-window envelope, insert the check, and drop them into the snail mail in Canada. That sounds like a sequence that you would need to hire some Vancouver bookkeeping company to do other thanjust the generation of the money orders.

But James had some news.

Premium Plan Auto Cash


He said he had just learned that BMO now offers a Premium Plan which includes a service called “Auto Cash.” If you maintain a minimum balance of $5,000 CAD in a primary CAD checking account, there is no fee; otherwise, the fee is $25/month.

With this, BMO will pay your creditors, including U.S. creditors, electronically, out of your USD checking account at BMO.

Can you do this online as many if not most U.S. consumers do these days? I am told not. Not across the Canadian border.

In other words, you must have a CAD primary checking account with at least $5,000 CAD in it at all times, or pay a $25/month fee to qualify for the Premium Plan. That gets you the Auto Cash feature. To pay your U.S. bills, however, you use your USD checking account at BMO, not the CAD account with the $5,000 in it.

Gotta make an 877 call

To pay your bills, you call 877-730-0265 20/7 (They close from 2AM to 6AM Eastern time) and prove your identity to a human using a code. I just called and talked to one of them at 8:49 PM PDST for general information. Excellent service.

There is an initial set up that takes about 10 days. Typically, you would provide information about yourself, your U.S. bank that you want to pay your minor bills out of, and your major “billers.” “Billers” are big-time companies like credit card companies, mortgage servicers, insurance companies. You set up each with your account number. BMO has previously set up arrangements to send auto cash to these creditors.

If you pay your bills once a week like we do, you would call 877-730-0265 and:

1. prove your identity
2. tell them how much you want sent to your U.S. bank to cover the checks you are writing to pay small creditors
3. tell them how much to pay your major “billers” to whom you owe money that week

The money from BMO to your U.S. bank will arrive in two business days. The money will arrive at your “billers” in 3 to 5 days.

This is not a SWIFT wire. There is no fee and it takes fewer days especially when sent to your bank. There is no snail mail involved.

Auto cash a two-way street?

Is Auto Cash a two-way street?

No.

To get your USD from your pay, business, pensions, etc. into your BMO USD checking account, you have to do it the old-fashioned way. Direct deposit by the payer, snail mail, SWIFT wire, walk across the border with a check or cash if you live near the Canadian border.

Synchronized snail mail

The system I used with my social security deposit each month is to send a check for the after-tax amount to my BMO USD checking account on the 23rd of each month. I also print out the statements online from my five foreign banks on that date.

Then on the 7th of the following month, which is the date my social security deposit arrives in my US bank, I go online to BMO and transfer the amount from my USD BMO account to my CAD BMO savings account. In other words, I trade US dollars for Canadian dollars. I have a piece of card stock in a bill-paying tickler file on the 23rd and another on the 7th. Each card reminds me what to do on the appointed date.

The purpose of the two weeks between when I write the check to BMO and mail it to them is to synchronize the presentation of the check to my US bank for payment with the arrival of the Social security deposit. The purpose there is to have the social security money only be in my US bank for one day. By the next day, it is in BMO and in CAD.

BMO Harris Trust

I am looking into using BMO Harris Trust, a Chicago area U.S. bank, to move money from the U.S. to BMO Canada in a cheaper and faster way than SWIFT wires or my Rube Goldberg 23rd-7th procedure. BMO Financial Group in Canada owns both BMO Harris Trust and BMO Canada. But make no mistake, BMO Harris Trust is a U.S. bank and they will comply with U.S. capital controls. BMO Canada, on the other hand, is a Canadian bank and they are not subject to U.S. capital controls. BMO Harris Trust may have some sort of reverse “auto cash” for BMO Canada only.

I have admonished readers unequivocally and repeatedly not to rely on BMO Harris Trust to hold your CAD currency. But they may be the best way to transfer USD to BMO Canada.

Once I get this all set up, I will watch the amount kept in USD in Canada and slowly lower it by moving the other USD into the CAD savings there. When I get to the point where I occasionally have to bring CAD back to USD to pay USD bills, that will be the optimal amount of USD in the USD account in Canada.

Big picture

• Generally, the purchasing power of all USD and USD-denominated assets worldwide will be wiped rapidly out by hyperinflation.

• Shortly after the hyperinflation starts in the U.S., capital controls will prevent you from getting more than small amounts of travel-abroad money out of the U.S. At present, you can move all you want out of the U.S.

• Once the capital controls come down, about all you will be able to do with future USD income is buy hard assets ASAP.

• Once hyperinflation starts in the US, you would immediately move all your USD in Canada into CAD. Because they are outside of US capital controls, you would be allowed to do that and you could complete it in about 20 seconds as I said above. Meanwhile, your fellow Americans who rejected the need to do this back when it was permissible to do so, will be frantically trying to get their USD out of the country, to no avail. Thereafter, you would simply pay US bills out of your future entrapped US income.

• Eventually—I figure about six months to two years—US hyperinflation will end overnight. No USD purchasing power lost during hyperinflation will be restored by the end of hyperinflation, but whatever new US currency that replaces the old hyperinflated dollar will probably be stable for generations.

Practice capital control cash management starting right now. That means get all USD-denominated money and assets out of the country right now and get all future USD income out of the country as soon as you receive it. Keep as much of it in selected foreign currencies as possible, but avoid converting USD into CAD then back to USD again to pay routine bills prior to the start of hyperinflation. After USD hyperinflation starts, do not own any USD either in the U.S. or in any other country for one second longer than you have to. Hyperinflated currency is a hot potato.